Listen to this article now
With the explosion of new businesses and startups across various industries today, many business newbies are stepping into their new world of commerce without adequate protection.
Think of it as a fireman running into a burning building without a fireproof suit.
Most of us have business ideas that we are eager to launch. They have probably been brewing in our thinking hats for a long time, and we cannot wait to get the show on the road. The enterprise could be as simple as an online business on YouTube, or something more traditional like a brick and mortar shop on a street corner selling fishing gear.
Whatever your business idea may be, you want to have the right protection that will ensure you will not get burnt once you jump into the “flames” of business dealings. What is this adequate protection that a business owner needs to ensure that it possesses before it jumps into the fiery realm of commerce?
One word: Contracts.
The world of business is full of contracts. Without naming a laundry list of all the contract types that you could get into in business, I will state 6 essential contracts you want to have in your arsenal before leaping into your business adventures.
1) Legalize Your Business
Don’t be too eager to get started in a business without first establishing the business under a legal entity contract. To explain this further—Let’s say you are proud of your given name: Joe Elmo Smith the Third. You may want to open your business doors under your name as Joe Elmo Smith’s Fishing Gear because the name has a historic ring to it. Afterall, Joe Elmo is a cherished family name that your dad and granddad had been known by.
However, even though the easiest way to get started in the business is by simply opening your doors under your name, and also the least expensive, it is highly recommended that you contract the business as a legal entity with its own identity separate from your own individual identity. This means that instead of opening shop as Joe Smith the individual, you want to register your business with your state or government authority as a corporation or limited liability company. Such registration will provide the business with its own identity. The business is now it’s “own person,” known as Joe Smith Fishing Gear, Incorporated.
What does this mean? It means that if, for instance, a customer buys fishing hooks from Joe Smith Fishing Gear, Inc., and their little son gets injured by the hooks during a fishing expedition, leading to their returning to Joe Smith, Inc. and stating that your product was defective, any compensation that you will be giving back to the customers, up to paying for medical bills, would not come out of your pocket, but rather, would be taken from Joe Smith, Inc’s account—the company which sold the hooks to the customers, which is a separate entity from you. You are protected from liability.
2) Vendors and Independent Contractors Contracts
As a business entity, you will undoubtedly deal with third parties. Who are third parties? They are vendors, other people or companies that you will engage with in the course of fulfilling your business needs. For instance, Joe Smith’s Fishing Gear, Inc is a company that will need to have a supply of fishing hooks, fishing nets, or any other gear necessary for customers that want to buy fishing equipment. This means that Joe Smith Fishing Gear, Inc. will need a vendor that supplies fishing equipment.
Before engaging a supplier, otherwise known as a vendor, or any other party that will provide goods or service to the fishing company, you want to have a standard form of vendor and/or independent contractor contract template. This template will provide basic guidelines on how you want your vendors to deal with you when supplying you with goods or services for your company. There are several online sources available that provide business contract templates of this nature. If your business is of a more specialized kind that requires more than a basic form of vendor template, it is recommended that you engage an attorney to discuss this document and how to set it up.
3) Employee Contracts
At some point, be it at the beginning of the business venture, or later, the company would likely need one or more employees to support its business. At the onset of setting up the company, it is a good idea to plan ahead about what your expectations would be from anyone you will hire into the business. This will help you with the set up of an Employee Contract template, a useful addition to the arsenal of any business startup. The Employee Contract will lay out terms such as confidentiality, how to deal with customers, and any other details that you want to ensure that the employee is aware of before starting an employment contract with the company.
4) Product and Service Agreement
This is a startup business contract that is often overlooked. Many businesses put their goods or services out into commerce without considering the terms that need to be made available to the customers. These terms will make clients aware of what they are agreeing to when they purchase goods or services from your company. The agreement will be useful as well if, in reverse, you are purchasing goods and services from another person or business, and you want all parties to be aware of expectations from the transaction.
For instance, who is responsible for payment of shipping costs for the goods? If it is a purchase of services, what are your expectations on quality of the service? This, and other details, will help make clear the interaction between the purchaser and seller and will resolve common issues that many startups face with regards to the goods and services that are part of their business dealings.
5) Intellectual Property Agreements
Every business typically has intellectual property. Intellectual property, or IP, are the inventions or creations of the mind that form part of a business’s assets. For instance, Joe Smith Fishing Gear, Inc. may create a new type of fishing hook that is able to catch an elusive type of fish because of the hook’s attractive design. This new type of fishing hook is an invention, an original creation by Joe Smith Fishing Gear, Inc. It would be in the best interests of the company, therefore, to consider IP agreements as part of its repertoire of startup contracts so that if any inventions or original ideas pertaining to the business are created, be it by an employee, or a contractor, or even Joe Smith, the company owner, the rights of the idea owner are clearly defined. The contract could provide that the idea owner would be compensated for their idea, or they would assign all rights in that idea to Joe Smith Fishing Gear, Inc. The key point in having this contract is that the company is protected from uncertainty, up to and including litigation, because these rights have been clearly spelt out in the treasury of startup contracts that the new business had the foresight to create when it first opened its doors.
6) Refund Policy
Last, but not the least, is the new business’s refund policy. It is inevitable in every business that there will be dissatisfied customers. A startup needs to be prepared for such eventualities. Therefore, one of the contracts to start with, is a refund policy, a business Terms and Conditions documents that enables customers to know what to expect if they find themselves in a situation that requires their returning of the goods or services purchased from the company.
With these 6 basic contract types in a startup collection, the new business is armed with the essential support it needs to begin a journey into an exciting world of commerce.
Have any more contract tips startup founders should look for? Let us know down in the comments.
This article originally published on GREY Journal.
Great article. The first essential
contract was one of my first task when I started my freelance editing business, although I didn’t make it an LLC. I’m still not familiar with that one, but I was told about making it a sole proprietor. Thanks for this information.
Hi Cathryn, you are welcome, and thank you for the feedback! It is a fantastic idea to have some protection for your business. It preserves the assets you are creating for it – and it definitely helps with building your brand!
I will definitely look into an LLC by the end of this year. I am currently working on how to sustain revenue for my business. My apologies for the late reply.